Strict construction of deemed profit provisions excludes compensation for destroyed assets unless business use and continuance conditions are met.

Compensation, insurance or salvage money received for destroyed business assets is taxable as deemed business profits only where the statutory conditions in the relevant previous year are satisfied. The fourth proviso to section 10(2)(vii) was construed strictly: the business must have been carried on for part or the whole of that year, and the machinery or assets must have been used in that year. Because those conditions were not met on the facts found, the receipt was not taxable under the proviso and the answer went in favour of the assessee.

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Issues: Whether compensation received on destruction of business assets by fire was taxable as deemed business profits under the fourth proviso to section 10(2)(vii) of the Indian Income-tax Act, 1922 when the business was not carried on and the assets were not used in the relevant previous year.

Analysis: The charging of excess insurance, salvage or compensation money under the fourth proviso was held to depend on the same strict approach applied to the cognate proviso dealing with sale proceeds. The proviso was construed to require that, in the previous year in which the money is received, the business must have been carried on for part or the whole of that year and the machinery must have been used in that year. The provision was treated as bringing to tax only escaped profits within the limits expressly laid down by the statute, and its language was not extended beyond those conditions.

Conclusion: The compensation amount was not taxable under the fourth proviso to section 10(2)(vii) on the facts found, and the answer was correctly given in favour of the assessee.

Ratio Decidendi: Compensation, insurance or salvage moneys received for destroyed business assets are taxable as deemed profits only if the statutory conditions tied to use of the assets and continuance of the business in the previous year of receipt are satisfied; taxing provisions of this kind must be strictly construed.

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